The Impact of Obamacare on Small Business

The impact of the Affordable Care Act (ACA) on costs will be especially acute for small businesses, explains Senior Fellow Devon Herrick in a new report from the National Center for Policy Analysis.

While large corporations typically self-insure (paying for their employees' medical bills and hiring insurers to administer benefits), small businesses generally purchase group health coverage. As they renew their coverage, small businesses are facing a series of cost-increasing regulations that will ultimately affect all business operations, including hiring, employee compensation and business growth.

Since nearly two-thirds of Americans with health coverage have employer-sponsored health insurance, much of the burden of complying with the ACA will fall on businesses.

The Congressional Budget Office (CBO) estimates that the required coverage for individuals will cost $5,800 a year or more by 2016 -- equivalent to an additional $3 per hour "minimum health wage." Family coverage could cost more than twice that amount.

Because businesses with less than 50 full-time employees are exempt from the requirement to provide health insurance, those with 50 or more workers are incentivized to cut their workforces, move employees to part time or not offer coverage at all. The ACA's $2,000 fine per worker for not providing health insurance is less than the cost of providing it.

While firms were told that their health plans would be "grandfathered," insulating them from regulation, that status is easily lost when plans change. Two-thirds to 80 percent of small business employer plans will likely lose their grandfathered status. Large, self-insured companies and unions, however, are free to change their third-party administrators and still retain grandfathered status.

According to a survey by Morgan Stanley, premium rates have risen substantially. Firms renewing small group insurance in 2014 saw an 11 percent premium hike. For firms with coverage through BlueCross, the premium increase was almost 16 percent.

Premium increases were much higher in some states than others. Premiums for small group policies renewing in 2014 increased 66 percent in Pennsylvania, 37 percent in California and 34 percent in Indiana. Washington saw premiums rise by an astounding 588 percent.

To reduce their costs, employers are responding in several ways: passing on as much of the cost as they can to workers, raising copayments and boosting costs for dependent coverage. A survey by the Society for Human Resource Management found that more than four out of every 10 small business owners have delayed hiring, while one in five have reduced the number of workers they employ.